Working Paper: CEPR ID: DP10671
Authors: Bernard Caillaud; Gabrielle Demange
Abstract: This paper analyzes the joint design of fiscal and cap-and-trade instruments in climate policies under uncertainty. Whether the optimal mechanism is a mixed policy (with some firms subject to a tax and others to a cap-and-trade) or a uniform one (with all firms subject to the same instrument) depends on parameters reflecting preferences, production, and, most importantly, the stochastic structure of the shocks affecting the economy. This framework is then used to address the issue of the non-cooperative design of ETS in various areas worldwide and to characterize the resulting inefficiency and excess in emission. We provide a strong Pareto argument in favor of merging ETS of different regions in the world and evaluate the welfare gains in each region.
Keywords: Cap-and-Trade; Mechanisms; Climate Policies; Tax
JEL Codes: D62; H23; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| mixed policy (H44) | efficiency of emissions reductions (D61) |
| uniform policy (L67) | efficiency of emissions reductions (D61) |
| economic shocks (F69) | optimal abatement efforts (Q52) |
| optimal tax rate (H21) | first-best outcomes (H21) |
| cap-and-trade quotas (Q58) | first-best outcomes (H21) |
| uniform cap-and-trade system (Q58) | fluctuations in emissions (E32) |
| tax system (H20) | fluctuations in emissions (E32) |
| merging emissions trading systems (F15) | Pareto improvements (D61) |
| coordination (P11) | efficiency (D61) |
| coordination (P11) | excess emissions (Q52) |